$MSCI MSCI Inc Q3 2024 Earnings Conference Call

Good day, ladies and gentlemen, and welcome to the MSCI third quarter 2024 earnings conference call. As a reminder, this call is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, where participants are requested to ask one question at a time, then add themselves back to the queue for any additional questions. We will have further instructions for you later on. I would now like to turn the call over to Jeremy Ulen, Head of Investor Relations and Treasurer. You may begin.

Thank you. Good day and welcome to the MSCI third quarter 2024 earnings conference call. Earlier this morning, we issued a press release announcing our results for the third quarter 2024. This press release, along with an earnings presentation and brief quarterly update, are available on our website, msci.com, under the Investor Relations tab. Let me remind you that this call contains forward-looking statements, which are governed by the language on the second slide of today's presentation. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from the results anticipated in these forward-looking statements. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings. During today's call, in addition to results presented on the basis of US GAAP, we also refer to non-GAAP measures. You will find a reconciliation of our non-GAAP measures to the equivalent GAAP measures in the appendix of the earnings presentation. We will also discuss operating metrics such as run rate and retention rate. Important information regarding our use of operating metrics such as run rate and retention rate are available in the earnings presentation. On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wishman, our Chief Financial Officer. As a housekeeping item, we wanted to remind our analysts to ask one question at a time during the Q&A portion of our call. We do encourage you to ask more questions by adding yourselves back to the queue. With that, let me now turn the call over to Henry Fernandez.

Thank you, Henry, and greetings everyone. In my remarks today, as I review our third quarter results, I will focus on our progress and opportunities with individual client segments across the investment ecosystem. Let us start with asset owners, who accounted for some of MSCI's most notable Q3 business wins. Overall, we delivered 11% organic subscription run rate growth with asset owners, showing particular strength in analytics. In Asia, for example, a large public pension fund made MSCI their primary risk analytics provider, leveraging our highly competitive mix of applications, sophisticated algorithms, specialized data, and managed services. We closed another significant deal in analytics with a US public pension fund who selected MSCI as their analytics platform of choice for the entire investment process, from planning and asset allocation through to performance attribution and measurement. In each case, MSCI displaced a major competitor. Deals like these helped us achieve our best third quarter on record for recurring sales in analytics, with particular strength in both Europe and the Americas. Despite the softness that Henry mentioned, asset managers remain the largest contributor to our subscription run rate, adding over $60 million of organic run rate in the past 12 months alone. Our firmwide retention rate among asset managers has stayed high, and it was close to 96% in the third quarter. Our asset manager clients still face fee compression, leading to tighter budgets, though there are some signs of stabilizing redemption pressures and improving inflows. In MSCI index-linked ETFs, year-to-date inflows were nearly $68 billion, which helped our ABF revenues grow nearly 20%. As Henry mentioned, our work in index increasingly reinforces our work in climate, and MSCI is leveraging this integration to help asset managers navigate the low-carbon transition. In the third quarter, one of our pension fund clients in Europe seeded a $1.6 billion ETF linked to an MSCI climate custom index launched by one of our asset manager clients. Turning to other client segments, MSCI also did well with hedge funds, wealth managers, and banks and broker-dealers, who have collectively added $60 million in organic subscription run rate over the past 12 months and grew by 10% combined in Q3. For example, we completed a large ticket deal with a global quantitative investment firm who will use our index content and analytics risk data to enhance their overall research and alpha generation strategy. Shifting to wealth managers, they have added about $1 million to MSCI's organic subscription run rate over the past 12 months. Our wealth subscription run rate now stands at $112 million, growing 11% organically, and we have a wealth retention rate of over 97%. MSCI's wealth solutions have become a key differentiator with clients seeking firmwide investment tools that support the home office while enabling optimization and alignment across leverage, risk, rebalancing, taxes, and securities and fund selection. We are well positioned to build on this momentum, leveraging the MSCI Wealth Manager platform in different business areas. Wealth represents a key opportunity for MSCI, and we will continue growing our wealth-focused investments across product, client coverage, and research. As you can see, MSCI remains determined to increase our wallet share with both established and newer client segments throughout the investment ecosystem. All of this has enabled our consistent delivery of attractive top-line growth and profitability. And with that, let me turn the call over to Andy.

Thanks, Baer, and hi everyone. In the third quarter, we delivered 11% organic revenue growth, 17.7% adjusted EBITDA growth, and 46% free cash flow growth. Within our index segment, subscription run rate growth with asset managers and asset owners was 7% and 11%, respectively. These large, established client segments represent nearly 70% of our index subscription run rate. Index subscription run rate growth with hedge funds and wealth managers was 23% and 13.3%, respectively, in the third quarter. Global cash inflows into equity ETFs linked to MSCI indexes was $8.6 billion in the quarter. We saw robust cash inflows into non-US exposures, particularly in developed markets outside the US. These flows, together with strong market appreciation, helped to power another quarter of record balances, with AUM in equity ETFs linked to MSCI indexes of $1.76 trillion. Additionally, AUM in non-ETF passive products linked to MSCI indexes reached $3.65 trillion, also a record balance. The combined record AUM balances of $5.4 trillion across ETFs and non-ETF index products linked to MSCI indexes drove nearly 20% year-over-year growth in ABF revenue and reflect momentum in the long-term trend of indexed investing. In analytics, subscription run rate growth was 8%, reflecting the traction we see across several key growth areas such as our factor models, our insights offering, and our fixed income analytics offering. Organic revenue growth was slightly below 12% in the quarter, benefiting from another quarter of strong non-recurring revenue and some large implementations coming online faster than anticipated. We still expect recurring revenue growth rates to more closely align with run rate growth in the upcoming quarters, especially as we begin to compare to prior year periods that included large implementation-related revenues. As a reminder, the timing of implementation is lumpy, and revenue growth will fluctuate for several reasons as it has in the past. In our ESG and climate reportable segment, organic run rate growth was 11%, which excludes the impact of FX and about $5.3 million of run rate from Trove. Regionally, the subscription run rate growth for the segment was 22% in Europe, 18% in Asia, and 7% in the Americas. Client engagement remains strong, and we continue to see clients looking to grow with us on a number of fronts. We have seen successes from clients looking to consolidate providers, solidifying our position as a leader. We remain competitively differentiated, and we continue to believe our ESG and climate solutions are a mission-critical part of the investment process, representing a massive opportunity across ESG integration, regulatory compliance, and climate. We also recognize that the recovery of this product line to higher growth rates may take some time. In private capital solutions, run rate growth was 177% over the same period last year, with new recurring subscription sales of over $6 million. Since the end of 2023, over one quarter of our incremental private capital solutions run rate growth has originated from new client relationships. The private capital solutions retention rate was almost 94%, and we recorded almost $27 million of revenue for the quarter. In real assets, run rate growth was roughly 5% in the third quarter, with a retention rate slightly above 92%, improving both sequentially and versus the same period last year. During the quarter, we closed a few large ticket deals in the Americas. One of these large deals was for our transaction data offering and was enabled by our open integration, which allows clients to access our large content sets on platforms like Snowflake. We see very early signs of improving market activity, although the commercial real estate industry continues to see significant pressure. Across the company, we saw the resilience of our financial model and our ability to generate strong free cash flows. In the third quarter, we repurchased over $199 million of MSCI shares at an average price of roughly $522. This brings our year-to-date repurchases to $440 million, or 879,000 shares, at an average price of about $501. Our cash balance at quarter end was over $500 million, and we continue to be focused on opportunistically repurchasing our shares. I would highlight that we paid down $125 million of our revolver subsequent to quarter end. Moving forward, we may pay down and draw the revolver in modest amounts from time to time to support our capital uses and optimize interest expense. Turning to our 2024 guidance, consistent with our previous comments, if markets remain at current levels or higher, we expect to be towards the higher end of our expense guidance range for full year 2024. We have increased our capex guidance range by $10 million, reflecting our plan to purchase a larger amount of hardware for our data center in the fourth quarter. We are enhancing our data center environment to more effectively and efficiently support the growth of several of our new solutions in a hybrid cloud and data center approach to infrastructure. We have increased our free cash flow guidance range by $80 million, which reflects some strengthening of tax collections and some tax timing benefits this year. We are seeing a $40 million discrete tax timing benefit and a roughly $30 million deferral on certain cash tax payments. It is worth noting that the $30 million cash tax deferral will be paid in early 2025. The lower interest expense guidance primarily reflects the previously mentioned revolver pay down. We also narrowed the forecasted range for the effective tax rate to 18 to 19.5%, based on refined estimates of discrete items we expect to be finalized in Q4. In summary, we remain encouraged by the dialogue with clients, and we see very attractive long-term opportunities. While we are beginning to see some gradual signs of improvement in the sales pipeline, we still expect some degree of elevated cancel activity and longer sales cycles to continue in the near term. We look forward to keeping you posted on our progress. And with that, operator, please open the line for questions.

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. As a reminder, please ask one question at a time and recue your line for any additional questions. Your first question comes from the line of Manav Patnaik from Barclays. Please go ahead.

Thank you. Good morning, Henry. I just wanted to ask about the recent management changes you made in both ESG and private credit. Those are obviously two areas that you have talked a lot about having a lot of long-term, massive opportunity. So just trying to understand if that is signaling any change in strategy or any nuances that you might want to point out to us.

Your next question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead.

Hey, thanks so much. Now that we are getting closer to the end of the year, I was hoping you could share any early read on the budget environment at your clients and maybe in particular how you are thinking about pricing in 2025. Thanks.

Sure. Hi, Toni, it is Andy here. I would say across MSCI and across our client base, speaking generally, we are beginning to see some gradual signs of improvement in dialogues, which we hope will translate through to some building of sales pipeline over time. I would highlight that we do expect elevated cancel activity and longer sales cycles to continue in the near term here. As you know, asset managers are our largest client segment by run rate, and while redemptions and outflows, as Baer mentioned, are stabilizing, asset managers are still managing with tighter budgets. So we do see that pressure in our dialogue day to day, although given the run in AUM, we are seeing more constructive dialogues and thinking around clients, which we hope translates through to improved budgets. On the pricing front, the message is consistent with what we have said in recent quarters, where we have been moderating our price increases, and the contribution from price to overall recurring sales is down slightly from a year ago. I would say we are very focused not only on the overall price environment and client health, but the value that we are delivering. Even where we can increase price more, and there probably are those opportunities, we are really taking a long-term view and a long-term approach here, and we want to be constructive partners to our clients. I think there are places where some of our competitors are being more aggressive on price, and I think this positions us well to build a relationship for the long term here.

Your next question comes from the line of Alex Kramm with UBS. Please go ahead.

Yes, hey, good morning everyone. Just wanted to stay on the same topic, and sorry if I am being too nitpicky about the super short term here, but I think Andy previously you had suggested that things should get better in the fourth quarter in particular on retention. So if I am hearing you correctly, it sounds like things are still pretty soft. So maybe you can be a little bit more specific how you think cancellations should be on a year-over-year basis in the fourth quarter, which is obviously the most important quarter, and then maybe the same comment on the sales, and if you want to be specific on the segments, given that you should have some line of sight by now, that would be helpful. Thank you.

Yeah, yeah, sure, Alex. I do not want to be too specific, obviously things can move quarter to quarter here, and as you have seen, we can have some lumpiness quarter to quarter. But on the cancel side, we are expecting Q4 cancels to continue to be elevated relative to the fourth quarter of last year. And as you alluded to, Q4 typically tends to be a period of higher cancels for us seasonally. I would say we are continuing to work through the impacts of the elevated level of client events that we have seen over the last year and the impact of many of the pressures that we have discussed on industry participants. I would say, consistent with our past comments, we do expect retention rates to be closer to the levels in the fourth quarter of last year relative to the size of the drop we saw in retention rates in Q3 compared to a year ago. On the sales side, as I alluded to, we continue to see tighter budgets. It really does vary across client segments. We are seeing earlier signs of constructive dialogue. I think, as I alluded to in the prior question, with the run in AUM, many of our clients are seeing their revenue improve, and so we have seen some encouraging signs, but these things take time to work through the system and work into resetting a budget with our clients. So we are cautious here, but hopefully see some early momentum.

Your next question comes from the line of Alexander Hess with JP Morgan. Please go ahead.

Yes, hi gentlemen. So we have had quite a few quarters now with discussion around the sales cycle in the asset manager channel specifically. But how do you guys internally make sure that it is not a product gap within MSCI or an execution gap within MSCI? And then, as we as analysts look externally, what would you say are the biggest metrics or external to MSCI factors that the community can track and assess when that pivot might happen on client budgets?

Yeah, thanks for the question, Alex. Baer here. So look, clearly when we are making that sort of assessment, the competitive situation is a critical one. We do not have enough time here to go product by product or sub-product, but certainly where we tend to view it as more of an industry thing, it is either where we may not be doing that great ourselves but the competition is doing significantly worse. There are some cases of that, you may have seen that in some of the announcements of earnings that have come out from some of our competitors. So that is an important indicator. We are also clearly looking at the amount of cancels that may arise from client events as opposed to, you know, a consolidation of the kind that we have seen during the course of this year. So that is an important distinction in the category of are we doing something right or wrong, etc. And I think generally, we have a pretty good track record of a high level of transparency on this call in terms of both indications relating to the product pipeline, the competition, and in terms of the external numbers. We give a pretty high level of granularity at the segment level but even below that, and some of the combined categories that we have created for you to analyze the market. So I think that when we look at the sum of all of those things, it does help us to differentiate precisely what might be a more challenging competitive situation from one which is more driven by the economics of the industry and what is happening more broadly within a given client segment.

Your next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please go ahead.

Thanks for taking my question. I just wanted to drill down further on ESG and climate. There was a reference to a cyclical but prolonged subdued demand there but strong secular trends. When do we start to see some of those cyclical headwinds moderate? What are the things that we should continue to track? And with this leadership change and a greater focus on climate, does that also help with the sales momentum and ability to bundle climate with ESG? Some color on that, please.

Your next question comes from the line of Scott Werel with Wolfe Research. Please go ahead.

Hey, good morning guys. Thank you for taking my question. I wanted to ask on the fixed income and multi-asset side of the business. When you look at the emerging growth opportunities, it was one of the stronger growers on an organic basis. Can you share with us where we are in your journey on the fixed income multi-asset class analytics side and how much more room there is for that side of the business to continue to grow at these elevated rates? Thank you.

Sure. Thanks for the question. As you heard in the prepared remarks, Andy mentioned that fixed income has been an important component of our strength and credibility across analytics. There are quite a number of sales where, in very simple terms, I don't think we would have had the same success three or five years ago with the capabilities we had then. It is an important component of multi-asset class sales, and we are looking for increasing ways of delivering those fixed income capabilities directly on a standalone basis to the front office, and we are seeing some success with that. As we go forward into next year, if we can continue to enhance important areas like fixed income performance attribution, which are critical to both sales and retention in analytics, and we have the intention and capability of doing that, then we believe this will continue to be a really solid part of our growth story. It is not a fast or sexy thing that moves quickly, but we are developing a reputation for delivering high quality, mostly in fixed income analytics but also increasingly in fixed income index. In both of those areas, we can expect the trend to continue.

Your next question comes from the line of Kelc with Autonomous Research. Please go ahead.

Hi, good morning. Thanks for taking my question. On private assets, with the new leadership in place, I want to circle back to your medium-term strategy to expand in that market. Previously, during the Burgess acquisition call, you talked about three buckets of private asset benchmarking data providers, and MSCI has plans to expand into the front end of compiling transaction benchmarking data. I am curious to hear your latest thoughts on that topic, as well as the investment you plan to devote to that area and the timeline of this expansion.

Hi, great question. First of all, what I am most excited about is that we intend to continue to collect much deeper and broader data in private markets, which will enrich our analytical capabilities extensively. The things we are doing with AI to scale up the breadth and depth of the data we collect are very exciting. I had some really exciting demos even in the last week, and in the coming year we will see significant expansion of that. That means we can continue to serve the LP client base, where we have significant demand and are growing in the high teens now, but we would hope to do better there. I am not changing the guidance, but we have a lot of opportunities. By taking all of that new data we are bringing in, we can do more in specific sub-asset class analytics, for example in private credit or other categories of private equity. In turn, we believe this can help us create a bridge between the LPs and the GPs and serve greater GP use cases. You also alluded to benchmarking and indexes in private markets. It is relatively early days since we took over those benchmarks and are redoing them. With our expertise, there are quite a number of enhancements related to specific use cases that we are in the process of improving. In the coming year, our role in benchmarking and measurement in private markets will extend beyond real estate into the other asset classes. Overall, I am very excited about the opportunity we have there, and bringing L on board will also help drive that strategy even further.

Your next question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. I wanted to revisit net new recurring subscription trends. Net new recurring subscription sales flipped from positive growth in Q2 to a decline in Q3. You talked about tighter client budgets and cancel rates in the quarter, which was also the case in Q2. Can you talk a bit more about what happened this quarter to drive this flip and what external conditions you would need to see for trends to improve?

Sure. Hey George. I would highlight that sales remain pretty strong. We saw particularly in areas like index and analytics, two large franchises, pretty good sales. We have just seen an uptick in cancels in the third quarter compared to a year ago. Cancels can be lumpy quarter to quarter, and we have seen that this year. We do expect some of that lumpiness to continue in the near term. Overall, as I alluded to, we are seeing early signs of improvement. Some of the cancels we have been seeing are a reflection of the client events we have seen over the last year, so we are still working through those. The combination of improvements in client dialogue translating through to enhanced sales pipeline, with us continuing to work through these lingering cancels, we believe should translate through to more encouraging recurring net new for us moving forward.

Your next question comes from the line of Fisa Ali with Deutsche Bank. Please go ahead.

Yes, hi. Thank you. I wanted to ask about competitive displacement. In your commentary, I think you were referring specifically to the analytics business and you mentioned several deals where you displaced a competitor. Can you give us more color around the sustainability of that and if there is a specific product leading to these displacements? Any additional color would be helpful.

Sure. If you look at ESG and climate, there is a lot of data showing that we are displacing competitors, notwithstanding some of the headwinds. For example, we still had 22% run rate growth in AMIA. There is plenty of evidence there. Our position in index is very strong, and in analytics, as you know, we have a longstanding policy that we don't go into any competitors by name here. These are often quite formal situations where there may be an RFP or a significant decision by the client, so it is pretty clear what the competitive framework is. Generally, a bit less so in private markets, where depending on what part of the woods you are in, the competitive situation is more fluid. Overall, we are confident that we are executing well in a competitive framework. Clearly, there is always new functionality and new capabilities being brought into the market by both ourselves and our competitors, but allowing for the information available to us, we feel solid about what we are doing regarding the competition.

Your next question comes from the line of David Matag with Evercore. Please go ahead.

Hey, thanks. Good morning. Andy and Baer, you both spoke about seeing early signs of constructive dialogues with clients, given the run in AUM which is helping revenue at your clients improve, and also some stabilization in flows. From your perspective, what else do you think you need to see before we reach an inflection point on new sales? Is there anything that makes you think the historic relationship between AUM and client activity will not hold in the future?

It is important to underscore that we do see varying dynamics across the business. We are a diversified franchise that has many different aspects to growth, so it is more complex than we are making it. We know our largest client segment is active asset managers. We know they have worked through a couple tough years where they have seen very strong outflows. We have seen those outflows stabilize, as you alluded to, and we have seen AUM increase year-over-year. These are organizations that are looking to grow, and they want to grow with us. The tools we provide them are tools that can help them grow, and that is encouraging for us. As you alluded to, those are things that should translate through to additional demand. The clients are not yet in expansionary mode, but they are in early days of constructive mode, and hopefully that translates through to more constructive budget setting for 2025 for us. I also want to highlight that we see strong momentum in other client segments. We are seeing outsized growth in many of those big markets where we are of smaller size today. We are seeing strong momentum in wealth, with big opportunities there. We have seen strong momentum in areas like insurance companies and asset owners as they increasingly internalize and become managers themselves. We are seeing big opportunities to grow with them, both on the subscription side and on the ABF side. We have a number of avenues of growth across the franchise that should continue to drive elevated growth on top of what we hope is some rebound on the active asset managers over the coming quarters.

Your next question comes from the line of Owen Lao with Oppenheimer. Please go ahead.

Yeah, it's Owen Lao from Oppenheimer. Thank you for taking my question. On analytics, I want to better understand the message here. Many of the peers talk about tight budgets and vendor consolidation, and I think you also talk about it. But both your recurring subscriptions and recurring revenue were pretty strong in the third quarter. Was it driven by implementation revenue or a large deal? If you can talk about the outlook for analytics, that would be great. And then quickly on the run rate, when I do the math by adding your beginning analytics subscription run rate to the net new sales, I got $685 million, but your reported number was $691 million. It would be great if you can explain the delta there. Thanks.

Sure. There are a few dynamics in there that I will call out separately. On your last question about the beginning run rate plus net new being different than the ending run rate, there are some technical items that can cause it to be different. One of the most notable is FX. FX movements impact the overall run rate base and can cause that run rate to move by different amounts than the net new addition. In terms of the growth in analytics, I will talk first about the overall business momentum and what that means for run rate growth, but then I will touch on the revenue growth, which has been elevated for the last several quarters, and what has been driving that. Across analytics, as Baer alluded to earlier, we have really had strong success on a number of fronts. Much of that is driven by an environment that is more dynamic, where there is heightened risk. We have seen strong demand for our equity risk models as clients are looking to understand what is driving their portfolios and have a better understanding of the bets they are taking. We see our equity risk models being integrated into many different parts of the active management industry. We have had tremendous success with hedge funds, but even with active managers. We have also seen some wins on the back of the improvements we have made in the fixed income offering, including things like liquidity analytics, which are areas that tend to get more attention in higher risk and more volatile environments. We have also been an enabler for our clients to be more efficient. Things like our insights offering or risk insights offering not only allow our clients to glean more insights from our risk services, but it makes it more efficient for them to work with us, so it can be a win-win. All those things in these environments are helpful and have been encouraging. On the revenue side, we did have a large implementation come online in Q3, which was earlier than we expected. As a result, we had a sizable revenue catch-up. We have seen a number of large implementations coming online over the last several quarters, which have caused the revenue growth to be higher than run rate growth. As we have said before, we expect revenue growth to drop to be closer to run rate growth, or even in some periods below that, as we begin to compare to the periods where we have had these large implementation catch-up revenues over this past year.

Your next question comes from the line of Craig Huber with Huber Research Partners. Please go ahead.

Yeah, hi there. Maybe just talk a little bit further about the environment here. I know you went on and talked about this a lot, but given how well the stock market has done not only this year but last year, given what the Fed is finally doing with lowering rates, inflation seems much more under control, and people a year and a half ago were very worried about a recession in the US that has not happened, and most managers you talk to feel better about the US economy. But with better AUM numbers out there, why do you guys keep talking about and sensing from your clients a tough operating environment? Is it still just too early to talk about 2025 and having those discussions? I would think those discussions in November, December, and January that set the budgets for next year are probably a lot more positive than a year ago. What am I missing here? Why are things so negative out there? What you are hearing is a little bit of green shoots but nothing great. Thank you.

Your next question comes from the line of Jason Hos with Wells Fargo. Please go ahead.

Hey, good afternoon and thanks for taking my question. I am curious why you didn't decide to raise the expense guidance range for the year, recognizing you are saying that higher AUM levels could lead you to the higher end of the range. Given how the markets have performed this year, why not take that up? Are you seeing offsetting savings, or is it the environment that keeps you more cautious to invest more? Any color would be helpful. Thank you.

Sure. We are always looking for opportunities to invest more in key growth areas in the business. As you alluded to, AUM levels are higher than those we assumed underlying our guidance at the beginning of the year. If they stay at this level or higher, we are likely to be towards the higher end of our expense guidance range, which is a reflection of a pickup in our level of investment. We are using it as an opportunity to continue to drive growth in compelling secular opportunities like rules-based index portfolios, private markets, enhancing our position with the front office in analytics, and investing in our architecture and interfaces including AI capabilities that not only drive internal efficiency but are powering growth. Those are all things we are focused on and will continue to do. We are continually balancing driving stable and continued profitability growth with investing for the long term, and it is a constant calibration. The other thing I would highlight is that there can be some lag. Some investments come through quickly, but some take time to work through. It is a nuanced dynamic on our cost base, and there are several factors at play that can cause expenses to swing quarter to quarter. I wouldn't read too much into one quarter and our expense guidance for the year. As I said, it is a constant calibration, and we are continually looking for opportunities to invest in the business.

Your next question comes from the line of Russell Clout with Redburn Atlantic. Please go ahead.

Yeah, good morning. Thank you for having me on. You reported another strong quarter of mid-teens run rate revenue growth in the custom and specialized index solutions. I think that now accounts for close to 10% of the index segment run rate revenue. I am wondering how big you see the opportunity here and what is differentiated about MSCI's proposition versus competitors that are also talking about growth here. As a second part to that question, can you explain to what extent, if any, growth in this business cannibalizes opportunities in other parts of the index business and how it affects the overall segment index margin?

Hi Russell, thanks for the question. We remain very excited about this. It is not merely a capability question, which is important, but it also plays itself out across very different use cases in different client segments. We are integrating the Foxberry acquisition into our custom index capabilities, and that will be coming online in roughly the next few quarters. That should give us significantly greater speed and flexibility in terms of what we can do, whether by different types of calculations, combinations of different asset classes, etc. In turn, I think where we have some competitive advantage is precisely because of both the models, the capabilities, and the research we have from analytics for portfolio construction and risk, factor exposures, and the enormous topic of climate and indexes adjusted on that basis, which we had in some of our prepared remarks today. The opportunities those are creating are significant. There is quite literally not a client segment we work with that doesn't need more of these capabilities, whether they be asset owners at the mandate or the entire plan level, and clearly even specific use cases depending on the type of asset owner. The asset management industry for products and benchmarks, the sell side for structured products which is a huge opportunity for us, and in wealth, the capabilities of doing mass customization with index linking to ETFs, building that into the wealth manager platform for wealth management firms to control risk at scale while customizing portfolios. All of this is really critical and an exciting part of our growth story. We are at an inflection point where we are just bringing on new capabilities in this area, which in the next few quarters and going into next year will become much more significant and will increase our speed to market and allow us to do a lot more. This will remain a very large opportunity for us.

Your next question comes from the line of Gregory Simpson with BNP Paribas. Please go ahead.

Hi, I just wanted to check in on how the RCA business is performing within the context of the 2% private assets organic run rate growth this quarter. When you originally acquired it, you talked about double-digit growth aspirations. What do you see as key to accelerate this back up? Is it mainly a cyclical issue around real estate transaction activity, or is there anything you can call out on the competitive side you are seeing? Thank you.

Thanks for the question. The simple and major challenge we have been seeing is transaction volume. It is a pretty straightforward answer. There was clearly a significant drop in transaction volume, which is a major part of the revenue drivers here. We are starting to see that pick up. There is evidence that the spread between buyers and sellers in the real estate market has compressed significantly, and we are starting to see the beginning of more transactions. We believe we are likely to see more in the coming year, maybe in keeping with the overall tone of this call where we are trying to be sober and maybe a little more in the under-promise and over-deliver department. We didn't put that in our prepared remarks, but I think we have good grounds to believe we could be turning the corner in that area in the coming year.

Your next question comes from the line of Alex Kramm with UBS. Please go ahead.

Yes, hey again. Just one very quick one on the custom opportunity that you just discussed. Maybe I am being too nitpicky on the numbers or glass half empty, but if I look at the run rate they disclosed for custom and specialized, I think it actually went down a couple hundred thousand dollars quarter over quarter. It is a small number and a small quarter, but just wondering if there were some elevated cancels to call out or why it didn't grow quarter over quarter. Thanks.

Yeah, Alex, nothing to call out right now. If anything, I would just say some of the broader pressures impacting the business are also impacting custom special packages. They are impacting all of our modules. But everything Baer said holds true. This is a massive opportunity for us, and we see strong engagement across many different client bases and use cases. The other thing to underscore here is that climate custom indexes is a key growth driver for us in ABF as well. Clearly, it is something that is helping on the subscription side, but it is also helping to fuel many different avenues within the asset-based fee line. We see that across institutional passive mandates, in the wealth channel with direct indexing, and even with ETF providers. It is one that is exciting for us on a number of levels.

That concludes our Q&A session. I will now turn the conference back over to Henry Fernandez for closing remarks.

This concludes today's conference call. Thank you for joining. You may now disconnect.